Optimal Hedge Ratio Calculator

Calculate the optimal hedge ratio for risk management and portfolio protection. Minimize variance through strategic futures hedging with comprehensive risk analysis and hedging effectiveness metrics.

✓ Risk Management ✓ Variance Minimization ✓ Hedging Effectiveness

Optimal Hedge Ratio Calculator

Calculation Method

Spot Asset Parameters

Annual volatility of spot asset

Current price of underlying asset

Number of units to hedge

Futures Parameters

Annual volatility of futures contract

Current futures contract price

Correlation between spot and futures

Hedge Ratio Formula

Optimal hedge ratio calculation

Formulas:

Correlation Method: h* = ρ × (σs / σf)
Regression Method: h* = β
Where: ρ = correlation, σs = spot volatility, σf = futures volatility, β = beta coefficient

Hedging Examples

Stock Portfolio Hedge
Equity index futures hedge
Commodity Hedge
Oil price risk management
Currency Hedge
Foreign exchange risk

Hedging Effectiveness

Perfect Hedge: Ratio = 1.0, Risk = 0
Over-hedge: Ratio > 1.0, New risk
Under-hedge: Ratio < 1.0, Residual risk
Optimal: Minimizes portfolio variance

Risk Considerations

🎯 Basis Risk: Spot-futures price difference
📊 Correlation Risk: Relationship changes
⏰ Time Decay: Hedge effectiveness over time
💰 Cost Analysis: Transaction and margin costs
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Understanding Optimal Hedge Ratio

The optimal hedge ratio determines the ideal proportion of futures contracts needed to minimize the risk of a spot position. It balances risk reduction with cost efficiency in hedging strategies.

  • Risk Minimization: Reduces portfolio variance to minimum level
  • Statistical Foundation: Based on correlation and volatility analysis
  • Dynamic Nature: Changes with market conditions over time
  • Cost-Benefit Balance: Optimizes hedging effectiveness vs. costs

Hedging Applications

Portfolio Management

Hedge equity portfolios against market downturns using index futures.

Commodity Risk

Manage price risk for agricultural, energy, and metal commodities.

Currency Exposure

Hedge foreign exchange risk in international business operations.

Interest Rate Risk

Protect against interest rate fluctuations using bond futures.